2018 (7) TMI 835 – AUTHORITY FOR ADVANCE RULINGS, KARNATAKA – 2018 (14) G. S. T. L. 546 (A. A. R. – GST), [2018] 2 GSTL (AAR) 112 (AAR) – Levy of GST – Job-work – Sale of beer bearing brand/s owned by M/s United Breweries Limited (Brand Owner/UBL) manufactured by Contract Brewing Units (CBUs) out of the raw materials, packaging materials and other input materials procured by it and accounted by it – supply of services or not?.
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Whether the CBUs are supplying any service to the applicant by undertaking to manufacture beer according to their specifications thereby rendering them liable to pay GST on the profit earned by them by virtue of supply of service to the applicant? – Held that:- In the realm of undertaking any manufacturing activity under an agreement, the manufacturer would supply service to the other registered person only in the event of the said registered person supplying goods to the manufacturer to work upon them. In other words the manufacturer would not be purchasi
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nt. Nevertheless the purchase is made and accounted in their books by the applicant – the ownership of the raw material required to manufacture beer rests with the manufacturer and not with the applicant. Therefore the applicant had not supplied any goods used in the manufacturing activity undertaken by the CBUs. Consequently the manufacturing activity undertaken by the CBUs does not qualify classification under Heading 9988 – The CBUs are not engaged in supply of service to the applicant and therefore there does not arise any liability to pay GST on the amount retained by the CBUs as their profit.
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Whether GST is payable by the Brand owner on the “Surplus Profit” transferred by the CBU to the Brand Owner out of such manufacturing activity? – Held that:- Since it is beyond doubt that the applicant is engaged in supply of service and the service does not find mention at any other entry in the Classification table it has to be placed in the residual entry. The applicable rate of Cen
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egar & Secretarial, UBL & Sri Venkatesh, Authorised Representatives RULING M/s United Breweries Limited, 20th Mile, Tumkur Road, Nelamangala, Bangalore Rural, Karnataka – 562 123, having correspondence address at UB City, UB Tower, 4th Floor, 24, Vittal Mallya Road, Bengaluru – 560 001 (herein after referred to as UBL / Applicant ) having GSTIN number 29AAACU6053C1ZH, have filed an application, on 10.01.2018, for advance ruling under Section 97 of CGST Act,2017, KGST Act, 2017 & IGST Act, 2017 read with rule 104 of CGST Rules 2017 & KGST Rules 2017, in form GST ARA-01. They also enclosed copy of challan for ₹ 10,000/- (CGST-Rs.5,000/- & SGST-Rs.5,000/-) bearing CIN number SBIN18012900046712 dated 23.11.2017. 2. The Applicant is engaged in manufacture and supply of beer under various brand names. The Applicant, apart from manufacturing beer on its own, also has manufacturing arrangement with contract brewing / bottling units (CBU) who manufacture brands of beer
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ther input materials procured by it and accounted by it and thereafter selling such beer to various parties under its invoicing would be considered as supply of services and whether GST is payable by the CBUs on the profit earned out of such manufacturing activity? (b) Whether GST is payable by the Brand owner on the Surplus Profit transferred by the CBU to the Brand Owner out of such manufacturing activity? 5. The Statement of Facts enclosed as Annexure -2 to the application reveals as follows: 5.1 UBL is in the business of manufacture and sale of beer under brands owned by them. They also have manufacturing arrangements with Contract Brewing/Bottling units (CBUs). The CBUs procure the required material and manufacture beer according to the specifications of UBL, label them with brands owned by UBL and sell the final produce as per the extant excise laws of the State(s). In order to ensure the quality and standard of the beer the manufacturing process is supervised by personnel from U
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fect from 01.07.2012 the activity of production of or process amounting to manufacture was covered under Section 66D (Negative List) implying that the activity undertaken by the CBU went out of the purview of Service Tax. The statute was yet again amended and the process undertaken by the CBUs once again came under the purview of Service Tax with effect from 01.06.2015. 5.5 During the alternating periods when this arrangement of manufacturing at the hands of CBUs was taxable the then CBEC issued certain clarificatory Circulars to tide over issues related to valuation and taxability.UBL has extensively discussed and cited the contents of Circular F. No. 332/17/2009-TRU dated 30.10.2009. The contents of this Circular are discussed at the appropriate place in this Ruling. UBL has further added that during the periods from 23.09.2009 to 30.06.2012 and 01.06.2015 to 30.06.2017 the CBUs have discharged Service Tax on the agreed bottling charges (comprising of manufacturing overheads and marg
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oned CBEC Circular dated 30.10.2009, held that the said activity was not liable to Service Tax. 5.7 UBL has also discussed an adjudication order passed in their own case. The adjudicating authority held that service tax was payable on the amount accounted by them as brand fee under intellectual property service. UBL has challenged this Order before the Tribunal. The matter is sub-judice. UBL has further based their challenge in the matter on the basis of decision by Tribunal in the case of BDA Pvt. Ltd reported in 2014(35)STR 570(Del) upheld by the Supreme Court as reported in 2016(42) STR J143 SC. 5.8 UBL has further presented that in the GST regime, post 01.07.2017, alcoholic liquor for human consumptions has been kept out of the levy of GST. With respect to the manufacturing activity carried out by the CBUs the levy of GST would arise only on the activity of treatment or process which is applied to another person s goods as per Schedule II to the CGST Act, 2017. It is further stated
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inputs(goods) owned by others (serial No. 26 of the Notification). The sum and substance of the applicants contention is that since in their case the CBUs manufacture beer out of raw materials physically procured by themselves, the activity of manufacture of beer of their brands does not amount to supply of service by the CBUs to the applicant. Reference is also made to Serial number 27 of the said Notification to emphasise that the manufacturing activity carried out by the CBUs does not fall within the purview of HSN Heading 9989 also. It has thus been summed up by the applicant that the manufacturing activity undertaken by the CBUs does not amount to supply of service to the applicant and therefore GST is not payable in respect of the amount retained in the hands of the CBUs. 6.2 In respect of the second question concerning the applicability of GST on surplus profit earned by them, the applicant has cited several case laws in favour of their arguments. The case laws are decisions by
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02.2018. All the narrations made in their application and both the Annexures were reiterated during the hearing. The representatives also submitted the following records for consideration in the matter:- (a) Brewing and Distribution Agreements between UBL and,- (i) Master (India) Brewing Company (ii) CMJ Breweries Private Ltd. (iii) Mount Everest Breweries Ltd (iv) Denzong Albrew Private Ltd (b) Technical know-how agreements between UBL and M/s Baba Loknath Glass Industries and Pacific Packaging Industries for manufacture of bottled water under brand name of Kingfisher . (c) Copies of judgements passed by Tribunals in the following cases:- (i) BDA Pvt Ltd Vs Commissioner of Central excise, Meerut (ii) Radico Khaitan Ltd Vs Commissioner of Service Tax, Delhi (iii) SKOL Breweries Ltd Vs Commissioner of C. Ex. & S.T., Aurangabad (d) Copy of CBEC Clarification Letter F. No. 332/17/2009-TRU dated 30.10.2009 (e) Copy of Order No. 17/2016-17 dated 02.06.2016 passed by Commissioner of Serv
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pplicant would provide the authority to the CBUs to manufacture beer to their specifications and then sell the same after affixing their brand on the product. 8.1 The applicant is engaged in manufacture and supply of beer under various brand names. The Applicant, apart from manufacturing beer on its own, also has manufacturing arrangement with contract brewing / bottling units (CBUs) who manufacture beer under brand names belonging to the applicant and supplies such beer to market. Copies of the following brewing and distribution agreements have been submitted by the applicant for illustration:- (i) Master (India) Brewing Company (ii) CMJ Breweries Private Ltd. (iii) Mount Everest Breweries Ltd (iv) Denzong Albrew Private Ltd The salient features of each of the agreements are discussed in the following paragraphs. 8.2 UBL and Master (India) entered into a Brewing and Distribution Agreement. The salient features of the agreement are as follows:- (i) Master (India) authorized to manufact
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o service the operational costs (raw material, PM, other consumables, bottle cost and retention for energy and fixed costs by brewer). The surplus will be transferred to UBL. (ix) representational rights in terms of use of the trademark are also earmarked allowing the brewer to only affix the marks and labels and sell the beer. The rights over the trademark remain UBL. (x) UBL shall be responsible for physical/financial injury, loss or damage arising out of consumption of the beer attributable to the manufacture of the beer. The brewer will be responsible for the physical or financial injury, loss or damage arising out of consumption of beer which may be attributable to bottling and packaging operations and shall indemnify UBL in that regard. (xi) upon termination or expiration of the contract Master(India) would dispose of unsold stock of UBL beer in its possession at ex-brewery price and make payment to UBL in terms of the contract. Further they will sell at cost raw materials, label
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ation. 9.1 UBL, being the brand owner, has the technical knowhow to manufacture beer to certain specifications typical of their brands. They are thus in possession of the intellectual property associated with their brands of beer. 9.2 The breweries, like Master (India), CMJ Breweries etc, are entities which have the licences and infrastructure to manufacture beer. 9.3 The scheme of the agreements provides that UBL would provide the technical knowhow to the breweries, including close supervision of procuring and manufacturing processes, and the breweries in turn would endeavour to manufacture beer of the requisite standards and sell the same as regulated by the State laws. 9.4 The revenue sharing agreement stipulates that apart from the cost of the raw material, cost related to energy consumption, fixed costs etc, the brewery would be entitled to a fixed sum. The balance left over after deducting all the costs, including statutory dues and taxes, shall pass on to UBL. UBL provides for t
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r input materials procured by it and accounted by it and thereafter selling such beer to various parties under its invoicing would be considered as supply of services and whether GST is payable by the CBUs on the profit earned out of such manufacturing activity? 10.1 Section 9(1) of the CGST Act, 2017, and Section 9(1) of the Karnataka GST Act, 2017 and Section 5(1) of the IGST Act, 2017 provide for levy of CGST, SGST and IGST respectively on all intra-state and interstate supplies of goods and services or both except on the supply of alcoholic liquor for human consumption. The end product, i.e. beer, whether manufactured by the applicant or the CBUs, is thus not exigible to CGST,SGST or IGST. 10.2 The point to be determined here is whether the CBUs are supplying any service to the applicant by undertaking to manufacture beer according to their specifications thereby rendering them liable to pay GST on the profit earned by them by virtue of supply of service to the applicant. 10.3 The
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egistered person only in the event of the said registered person supplying goods to the manufacturer to work upon them. In other words the manufacturer would not be purchasing and accounting the goods in their account books. 10.5 Furthermore it would be relevant in this context to examine the provisions of Notification 11/2017 Central Tax (Rate) dated 28.06.2017 as well as the scheme of classification of services enumerated in the Annexure to the Notification. The Annexure providing the Scheme of classification of services indicates that all the services have been divided into various Sections and further into headings. Services related to manufacture appear in Section 8 under Heading 9988. The Notification, at serial number 26, also requires that Heading 9988 is applicable when the physical inputs are owned by person other than the manufacturer. Further Heading 9989 also provides for classification of other manufacturing services apart from those under Heading 9988. There are four gro
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shall be supervised by the applicant. Nevertheless the purchase is made and accounted in their books by the applicant. This is further demonstrated by several clauses of the agreements. The clause in respect of Reimbursement shows that the CBU shall retain the cost of the raw materials amongst other things. This shows that the material was purchased by the CBUs. Further under the clause related to Termination of the agreement it is provided that in case the agreement stands terminated then the applicant will buy all the raw material at cost. Further any finished goods in stock would also be purchased by the applicant at ex-factory price. All these clauses indicate that the ownership of the raw material required to manufacture beer rests with the manufacturer and not with the applicant. Therefore the applicant had not supplied any goods used in the manufacturing activity undertaken by the CBUs. Consequently the manufacturing activity undertaken by the CBUs does not qualify classificatio
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urred by the brand owner is arrived at as under Turnover of the brewer Amount (Rs/case) (X) Less:Variable cost incurred(Raw material, PM & other consumables) (Y) Less: Bottle cost (at prevailing market rates) (Z) Less: Retention for energy & fixed cost by brewer (73) Balance payable to UBL as Brand Fee (5) Remaining as reimbursement to UBL (W) The retention on account of energy and other utilities will be ₹ 18/case and the remainder, on account of fixed cost and ROI on investments. ……… This provision in the agreement indicates that the applicant gets a brand fee in lieu of the permission granted to the CBU to utilize their brand. Further the surplus amount over and above the brand fee is taken as reimbursement or business surplus by the applicant. The question relates to the liability or otherwise of GST on this amount in the hands of the applicant received from the CBU after the deduction of all costs related to CBU. 11.2 The applicant has drawn extensively from th
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icating authority held that service tax was payable on the amount accounted by them as brand fee under intellectual property service. UBL has challenged this Order before the Tribunal. The matter is sub-judice. 11.3 The applicant has further contended in this regard that the CBUs are permitted to use their brand name to enable them to manufacture beer on their behalf and that the CBUs are not allowed to exploit the brand name or trademark. Section 48(2) of the Trademark Act recognizes such usage of trademark as use by brand name owner . It is further contended that the activity per se does not amount to transfer of right to use. The applicant has also drawn attention to decisions of Tribunal in the cases of M/s Skol Breweries Ltd reported in 2013(29) STR 9 (Tri), Radico Khaitan Ltd reported in 2016(44) sTr 133 (Tri) and BDA Pvt Ltd reported in 2014 (35) STR 570 (Tri).The decision in the case of BDA Pvt Ltd was maintained by the Supreme Court as reported in 2016 (42) STR J143 (SC) where
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on the products manufactured by the CBUs. The various orders to this effect were agitated before the Tribunals and it was finally held by the Tribunals that the brand owners were not providing any intellectual property right services to the CBUs. The amount accruing into the hands of the brand owners was held as business surplus or profit. The applicant discussed the orders of the Tribunal at length in their application as well as during the hearing. We have gone through all the Orders of the Tribunals and they support the contention of the applicant. 11.6 In the written rejoinder submitted by the applicant it is stressed that the amount in their hands represents the business profit (sale price of UBL beer to State owned corporations minus price payable to CBUs) earned by UBL, out of sale of beer. It is further added that CBUs are manufacturing alcoholic liquor only for and on behalf of the brand owner and they are not exploiting the brand names owned by UBL and thus there is no servic
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mentioned in sub-section 1. Further sub-section (d) provides that activities mentioned in Schedule II are to be treated as supply of goods or supply of services. 12.2 The activities mentioned at serial number 5(c) of Schedule II have been discussed by the applicant as the relevant services. This entry in the Schedule provides that temporary transfer or permitting the use or enjoyment of any intellectual property right constitutes supply of service. The applicant has argued that the erstwhile entry at Section 66E (c) of the Finance Act 1994 also reads exactly the same, meaning thereby that there has been no change in the GST regime on the issue. 12.3 Section 2(102) of the CGST Act, 2017 defines services as anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode, from one form, currency or denomination, to another form, currency or denomination for which a separate consideration is charged. This p
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ant provides the specifications to the manufacturer and also ensures that the CBUs buy raw materials as per their guidance and also manufacture the products under their supervision and to their exact specifications. The applicant then also gives the CBUs the authority to affix their brands on the products and then to sell them to the State Corporations. 14.2 The sale proceeds are utilized to first pay the CBUs the cost of the raw materials, bottling cost, energy charges and fixed retention charges. The balance amount accrues to the applicant as brand fee and business surplus/business profit. 14.3 There is a scope of supply of goods or services at three distinct places in this arrangement. The most evident scope of supply is the finished product sold by the CBUs. However as the product sold is alcoholic beverage for human consumption the same is beyond the scope of levy of GST as provided in Section 9(1) of the CGST Act,2017. The second event generating the scope for supply of service r
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can be either of the two, supply of goods or supply of service. Since there is evidently no supply of goods from the applicant to the CBUs it is beyond doubt that the amount received is on account of supply of service. Moreover service means anything other than goods (as per Section 2(102) of the CGST Act, 2017). It is thus beyond doubt that the applicant is engaged in supply of service to the CBUs. for which money is received and called as brand fee and business surplus. The terminology employed apart, the fact remains that the applicant receives an amount on account of supply of a certain service. This amount can thus rightly be termed as a consideration. The nomenclature of the amount received as brand fee or business surplus or business profit does not alter the fact that it is a consideration that flows to the applicant. 14.5 The applicant has consistently held that their act of allowing the CBUs to affix their brand names on the products manufactured by them does not amount to su
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ned in Section 7 from (a) to (d) are not exhaustive. The applicant has failed to observe the expression (1) For the purpose of this Act, the expression supply includes- ….. The word includes signifies that activities beyond those mentioned from (a) to (d) may also constitute supply a supply. Therefore the scope of supply of service is not restricted to just those mentioned in Schedule II. The applicant concentrated their attention only on Schedule II. When the facts in this para are read in harmony with those of Para 14.5 it becomes evident that the applicant is engaged in supply of service which is not covered under Schedule II. The fact that the supply of service is not covered under Schedule II does not imply that there is no supply of service and that GST is not chargeable thereupon. In this regard we examine the provisions of Notification No. 11/2017-Central Tax (Rate) dated 28.06.2017 and the Annexure to the Notification. 14.7 The Notification applies All Services . It therefor
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